The New York Times tells us that Donald Trump has been engaging in aggressive tax avoidance. The problem with this being that tax avoidance, as a thing, doesn’t exist. You can try to avoid taxes, structure things so that less tax is due, sure. But that then collapses, upon examination, down to either tax compliance – I’ve obeyed the tax law – or tax evasion – I’ve illegally paid not enough in tax.
Tax avoidance doesn’t actually exist. As I’ve pointed out in a slightly different case before:
Google Can’t Be Tax Avoiding Because There’s No Such Thing As Tax Avoidance
The narrative over tax avoidance in the UK is gaining enough traction that Google ‘s Chairman, Eric Schmidt, popped up in The Observer yesterday to explain the company’s actions. In it Schmidt makes a couple of points that support a long running contention of mine: there is no such thing as tax avoidance. That’s an extreme view in the current intellectual climate, certainly, but it has the merit of actually being true even if extreme.
Schmidt tells us that:
Second, politicians – not companies – set the rules. As the head of Revenue and Customs said in the House of Commons last week: “We are duty-bound to collect and investigate under regulations set out by lawmakers, not on what you’d [ie politicians] like us to collect.” When legislators are doing the lobbying and companies are articulating the law as it stands, it’s a confusing spectacle for everyone.
Third, given the intensity of the debate, not just in the UK but also in America and elsewhere, international tax law could almost certainly benefit from reform.
This is quite clearly true: it is indeed the politicians in the legislatures that determine what the tax laws are. And if they don’t like the results of the current laws then they should be working to change them. Which would lead us to a situation where:
Our hope is to move the debate forward, with everyone engaged constructively in developing a clearer, simpler system – one in which companies that abide by the law know that the politicians who devised the rules are willing to defend and commend them.
And of course Google does abide by current law. Or so it says: and there are those who are wondering whether that is true. Various campaigners are insisting that Google’s sales practices in the UK have tipped it over from being simply a service office into being a permanent establishment which means that the revenues (or profits rather) are subject to UK corporation tax.
Which is where my insistence that there is no such thing as tax avoidance comes in. There are most certainly attempts at avoiding taxes, of course. But in the end there is only tax compliance or tax evasion: you’ve either obeyed the tax laws or you haven’t. After the attempts at avoidance have been examined there is no grey area left: there is no such thing as successful attempts at tax avoidance. There is only compliance with the law as it is written or non-compliance with it.
We also have a system to determine what is which: it’s called the legal system. With tax it starts off with special tax courts and tribunals and if the decision isn’t clear after those moves on up to the High Court, Appeals and, quite possibly, to the European Court of Justice. As the old saw has it, the mills of justice may grind slowly but they do grind small.
As an example we might take the Vodafone case. At heart this was about which set of laws prevailed. The UK ones on the taxation of profits in overseas subsidiaries (the Controlled Foreign Corporation rules, or CFC) or the European Union ones on the freedom of establishment of companies. Vodafone had made large profits in Germany which it parked in a Luxembourg subsidiary (it is more complex than this but this is the short version). The UK wanted some of that money in tax as Vodafone is a UK domiciled corporation and the CFC rules said the UK could have some of it.
At this point we could certainly say that the Luxembourg strategy was an attempt at avoiding UK taxation righteously due. But what it finally pans out to be depends upon what the court system says about it. The end result of grinding through all those levels of the court system (including the results of a related case concerning Cadbury) was that the EU rules are paramount. That money sitting in Luxembourg was not taxable in the UK: unless and until it was brought back into the UK.
At which point what we’ve described as attempting to avoid tax collapses down into simply obeying the tax law. Vodafone did bring some of that cash into the UK and that is indeed the tax it has paid as part of the negotiated settlement. Once the court system had had its say there’s no room left for anything to be called tax avoidance: this is tax compliance, Vodafone had obeyed the law.
Similarly there are other cases (multitudes of them in fact) where the courts look at attempted tax schemes and it turns out that they are not obeying the law. Not obeying tax law is known as tax evasion. As I say, there might be attempts to avoid tax: but after examination they all collapse down into either tax compliance or tax evasion: legal or not legal.
Google and its sales practices in the UK: do they create a permanent establishment or not? That’s something that none of us know at present but we can be quite sure that (especially given the attention paid at present) that that legal system is going to have a look and determine the truth. It will, whatever people think it is now, become either tax compliance, obeying the law, or tax evasion, not obeying it.
All of which nicely underlines Schmidt’s point. The politicians are the ones who create these laws. If they’re unhappy with the results of the laws they’ve created they should change them. But allegations of tax avoidance make no sense: because there is simply no such thing. Either companies are obeying the laws that the politicians have passed or they are not. And we’ve a system for deciding that, the legal system. After all those attempts at avoiding tax pass through that legal system everything becomes either tax compliance or tax evasion. There’s just no room left for a successful attempt at tax avoidance: it doesn’t exist.